Genentech reports 48% spike in profit

ValBrickates Kennedy

BOSTON (MarketWatch) -- Genentech reported a 48% spike in its first-quarter profit late Tuesday, due largely to better than expected sales of its oncology drugs Herceptin and Avastin.

For the quarter ended March 31, Genentech
DNA, -3.57%
reported net income of $421 million, or 39 cents a share, which included the expensing of stock options. This compared with $284 million or 27 cents a share for the same period last year.

Operating revenue for the quarter rose to $1.986 billion, from $1.462 billion last year.

A poll of analysts by Thomson First Call estimated the biotech group would have adjusted earnings of 41 cents a share, on revenue of $1.964 billion.

"It was a solid quarter. The year-over-year growth was impressive," said Robert W. Baird & Co. analyst Christopher Raymond, after the company's quarterly conference call with analysts.

Genentech also said that it now expects to see 2006 adjusted earnings growth of between 45% and 55% per share. On March 17, the company said that it envisioned growth of between 40% and 50%.

On the call with analysts late Tuesday, Genentech management said they also expect royalty revenue to increase by 30% over that of 2005. Most of Genentech's royalties are generated by sales of its products overseas by majority shareholder Roche.

Previously, the company had expected royalties to grow by 20% in 2006, according to analysts.

Powering Genentech's performance was higher than expected sales of Herceptin, a breast-cancer therapy, and Avastin, which is used to treat colorectal cancer.

The biotech group reported that U.S. sales of its oncology drug Herceptin for the quarter grew 123% to $290 million, while Avastin sales shot up 96% to $398 million.

Wall Street, meanwhile, had been expecting Herceptin to post U.S. sales of $264 million and Avastin sales of $390 million, according to Montgomery & Co. analyst Shiv Kapoor.

While describing Avastin's performance as "in line," he said: "Herceptin sales were much higher than my expectations."

Genentech also announced Tuesday that it had filed to have Avastin approved to treat lung cancer. The company requested that the Food and Drug Administration approve the drug under its priority-review program, meaning the agency would make a decision within six months of submission.

The company added it plans to submit another application later in the second quarter to have Avastin approved to treat advanced breast cancer.

Kapoor said that the lung cancer submission had been expected by the end of the second quarter. He sees Avastin having sales of $647 million in the fourth quarter, including sales for the treatment of lung cancer.

However, sales of another popular oncology drug, Rituxan, rose only 8% to $477 million, falling short of Wall Street expectations of $499 million. The drug, originally approved to treat non-Hodgkin's lymphoma, also was recently given the green light by regulators for the treatment of rheumatoid arthritis, or RA.

On its call, Genentech said Rituxan's launch into the RA market, which began about three weeks ago, was in-line with its expectations.

"Overall, we were comfortable the quarter, although some other people had different expectations," said Ian Clark, Genentech's executive vice president for commercial operations, on the call.

Raymond said that although he didn't think Genentech was very clear on its call about why Rituxan sales were lower than expected, "It's really too early to judge any uptake in the RA setting."

Raymond also pointed out that while Genentech records Rituxan's sales, it then pays about a 30% royalty to Biogen Idec, whose predecessor Idec helped develop the drug.

Raymond also noted that investors often have lofty expectations of Genentech sales.

"The problem is the company has gotten everyone so used to stellar numbers that we now expect that," said Raymond.

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